BOOK REVIEW

INTANGIBLE VALUE

What creates value in companies? For most of the industrial and the businesses of the past, the answer was — physical and financial assets such as land, machinery and capital. For the businesses of today and tomorrow, value comes from an intangible but very real asset class, which includes employees, leaders, customers, suppliers, knowledge and relationships. There have been several success stories in the new economy. For instance, names like Charles Schwab, Microsoft and the Gap have outstripped their older industrial-age counterparts, because they have devised new business models. These models hook into "what matters" to customers, by relating their organizational assets — both concrete and intangible — as the building blocks to true customer value.

Cracking the Value Code: How Successful Businesses Are Creating Wealth in the New Economy by Richard Boulton, Barry Libert and Steve M.Samek [1], is in part based on a three year 10,000-company research project by Arthur Andersen.[2 , 3] Focussed on the real value creators, the authors say that much of the value being created today falls outside the formal financial reporting systems. Indeed, a key issue is that our 500-year old accounting systems have little room for the intangible value creators.

For example, there is the growing discrepancy between one's market value and book value. Book value of a company reflects its tangible assets. However, today, many of the companies with the highest market value have few physical assets and therefore a low book value. Take for instance, America Online's book value is only at 3.3 percent of its market capitalization. On the other hand, 97 percent of AOL's value was not to be found on the balance sheet. Similarly, by 1998, 72 percent of AOL's value of over 10,000 companies in the US was not to be found on their balance sheets. It is therefore clear, that today, companies create value through assets that are not measured and reflected in their balance sheets. Nonetheless, markets recognize this intangible value and reward companies with high share prices — and this means, the higher market value.

According to Murphy the book is written simple and makes its very readable. The book examines the full gamut of those possible assets (physical, financial, employee-supplier, customer, and those intrinsic to the organization) and, to show them in action, provides plenty of fun, fact- and figure-filled mini-profiles of New Economy dynamos, from robustly reengineered old war-horses like IBM, Coke, Pepsi and Sara Lee to brash, new digital-age brats: Dell, Compaq, Cisco, idealab! and Starbucks. It provides dozens of examples to show how companies use intangible assets to create value. It also offers a framework within which companies can recognize, invest in, manage and measure : all of what matters in the new economy.

According to reviewer Murphy, "each chapter ends with questions and actions you can directly apply to your own workplace, and an entire section is devoted to helping your company add value by stressing assets and build a new business model that reflects those central strengths. So if one wants the smart tip from one of the world's most influential consultants on exactly what companies are doing or have done to put themselves on the international market radar, one will eat this book up. And those looking to reposition their businesses for unprecedented market success by cracking their own value code, might even come back for seconds and thirds".

Web sites:

1. Cracking the Value Code: How Successful Businesses are Creating Wealth in the New Economy by Richard Boulton, Barry Libert and Steve M.Samek. HarperBusiness, 242 p. ISBN:0066620635. Rs.1200.

2. Timothy Murphy. Editorial Review (http://www.amazon.com/exec/obiodos/ASIN/006662035 )

3. Sarah Abraham. Value of the Mind. Intangible value. The Economic Times, 9-15 June, 2000. (freshinc[at]indiatimes[dot]com)

[Adapted by Sunder Singh BG, bgs[at]alpha[dot]nic[dot]in]